Cognizant Technology Solutions Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are included below where reported. Amounts are U.S. dollars.
Business context
Cognizant provides IT, consulting and business process services through a global delivery model, with substantial operations and workforce in India. Its four reporting segments are Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other. North America generated 77.6% of 2013 revenue.
Key financial results
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $8,843.2 million | $7,346.5 million | +20.4% |
| Income from operations | $1,677.9 million | $1,361.5 million | +23.2% |
| Operating margin | 19.0% | 18.5% | +0.5 percentage points |
| Net income | $1,228.6 million | $1,051.3 million | +16.9% |
| Diluted EPS | $4.03 | $3.44 | +$0.59 |
| Operating cash flow | $1,423.8 million | $1,172.6 million | +21.4% |
| Cash, cash equivalents and short-term investments | $3,747.5 million | $2,863.8 million | +$883.7 million |
| Working capital | $4,373.4 million | $3,437.0 million | +$936.4 million |
There was no third-party debt at year-end. GAAP net margin was 13.9%, down from 14.3%, principally reflecting a higher effective tax rate and larger foreign-exchange losses. The effective tax rate rose to 27.2% from 24.2%. Non-GAAP operating margin was 20.6% versus 20.2%, and non-GAAP diluted EPS was $4.38 versus $3.74; these measures exclude stock-based compensation and acquisition-related charges and are not GAAP measures.
Fourth-quarter 2013 revenue was $2,355.5 million, versus $1,948.2 million in fourth-quarter 2012; net income was $324.3 million versus $278.8 million, and diluted EPS was $1.06 versus $0.92.
Growth and changes versus 2012
- Revenue grew across all segments: Manufacturing/Retail/Logistics +24.7%, Financial Services +22.5%, Healthcare +17.1%, and Other +13.1%. Manufacturing/Retail/Logistics was the fastest-growing segment.
- Geographic revenue growth was strongest in Europe (+32.1%) and Rest of World (+28.3%); North America grew 17.5%. Europe growth included approximately $93.5 million from 2013 acquisitions.
- Consulting and technology services revenue rose 18.3%; outsourcing services revenue rose 22.6%.
- Operating margin improved as revenue growth outpaced headcount growth and the weaker Indian rupee reduced reported delivery costs, partly offset by compensation increases and hedge-settlement losses. Selling, general and administrative expenses including depreciation fell to 21.5% of revenue from 23.2%.
- Cash from operations increased. Investing cash outflow was $730.8 million, including higher investment purchases and acquisition payments; financing cash outflow declined to $30.9 million, mainly due to lower share repurchases.
Outlook, risks and unusual items
- No specific 2014 revenue or earnings guidance is provided in the filing. Management expected continued investment in talent and services, expansion in Europe and other international markets, growth in strategic clients, selective acquisitions, and cost discipline. It cited customer focus on cost containment and innovation, regulatory and technology shifts, foreign-exchange volatility, and global economic uncertainty.
- Management said cash and expected operating cash flow should meet operating requirements for the next 12 months and anticipated no near-term liquidity issues. The company intended to reinvest foreign earnings; $2,510.9 million of cash, cash equivalents and short-term investments was held outside the United States.
- Foreign-exchange exposure is significant: Indian-rupee cash-flow hedges had $2.34 billion notional value and a $354.9 million net unrealized loss at year-end. Settlement losses on these hedges were $163.0 million in 2013. Management cautions that hedges may not fully offset currency movements.
- Tax benefits from Indian tax holidays reduced 2013 tax expense by approximately $146.3 million. Management warned that changes to Indian tax incentives, tax rules, or the ability to use minimum alternative tax credits could affect results. Unrecognized tax benefits were $96.6 million; timing and cash settlement were uncertain.
- 2013 acquisitions included four business combinations for approximately $184.2 million net of cash acquired; goodwill increased to $444.2 million. The filing also reports $63.3 million in fixed capital commitments, $673.3 million in future operating lease payments, and ordinary-course legal claims not expected by management to have a material adverse effect.
- Key risks include dependence on India-based delivery and skilled labor, wage inflation, immigration and anti-outsourcing restrictions, client spending and concentration, competition and pricing pressure, fixed-price project overruns, cybersecurity and service disruptions, tax changes, and acquisition integration. Fixed-price contracts generated 34.0% of 2013 revenue.
- A two-for-one stock split was declared in February 2014, after year-end. Cognizant paid no cash dividends and did not repurchase shares under its program in fourth-quarter 2013; $502.1 million remained authorized at year-end.
Important facts for investors to verify
- Reconcile growth and margin trends using GAAP results, and assess non-GAAP adjustments for recurring stock-based compensation and acquisition costs.
- Review the Indian-rupee hedge position, expected hedge losses reclassified to earnings, and sensitivity to currency changes.
- Assess the sustainability of Indian tax incentives and utilization of minimum alternative tax credits, alongside the $96.6 million of unrecognized tax benefits.
- Track receivables and collections: trade and unbilled receivables rose with revenue, while days sales outstanding including unbilled receivables was approximately 73 days.
- Confirm subsequent stock-split-adjusted share and EPS figures when comparing periods; the 10-K’s reported historical per-share amounts are pre-split.